In our November 19 post, we said we are monitoring five key dimensions on ten key asset categories to gauge when, how and how much to commit the cash we raised in the summer to the markets in the future.

1. Technical Market Factors
2. Valuation Fundamentals
3. Risk Levels
4. Government Intervention Policies
5. Economic Conditions

Ten Key Asset Categories Relative Performance Since Oct 1:

click image to enlarge

Headlines Re - Government Policies and Economic Conditions:

The headlines in the financial press over the last 24 hours, clearly show that our 4th and 5th monitoring dimensions are not near to being settled enough to risk cash. Consider this headlines sample:

Nov 19 (Financial Times) — Junk bond yields spike — Average yields on US junk bonds have topped 20 per cent for the first time amid rising concerns about a protracted recession and a wave of corporate defaults.

The spike in yields could have a dramatic impact on economic activity, making new debt prohibitively expensive for companies with credit ratings below investment grade. Such junk-bond issuers account for 17 per cent of the S&P 500 and nearly half the corporate bond market, according to Standard & Poor’s.

November 19 (WSJ) – [China] Policy makers last week unveiled a four trillion yuan ($586 billion) stimulus plan intended to bolster an economy that is slowing as the West’s appetite for its manufactured goods declines.  … “Mutual funds and insurers are still cautious on fears the worst for the Chinese economy is yet to come,” said Wu Feng, a Shanghai-based analyst at TX Investment Consulting.

November 19 (WSJ) – The Indian government may spend more to stimulate a slowing economy as the global financial crisis threatens to stall growth…

Nov 19 (Financial Times) – Ugly reaction to Tarp U-turn — US mortgages and credit markets on both sides of the Atlantic have been severely jolted since the US Treasury turned its back on plans to use some of its $700bn in financial bail-out funds to buy troubled assets from banks.

More than a week has passed since Hank Paulson, the Treasury secretary, changed the parameters of the troubled asset relief programme (Tarp). Yet despite Mr Paulson’s insistence to Congress this week that policy actions were starting to bear fruit, the picture on the ground in the credit markets has turned uglier. …

The realisation there are no other buyers for some of the toxic assets the government has decided not to buy has led to a sharp fall in the value of mortgage-related assets and a wave of renewed selling.

“The Fed has realised that the Tarp cannot support unrealistic non-market prices,” says one London-based banker. “Now banks themselves are going to have to discount for that, too.”

Uncertainty and further losses have also rippled into the broader credit sphere, as valuations in Europe and the US for corporate bonds have fallen to fresh lows in recent days. The combination of weak economic data and illiquid, risk averse markets has been compounded by the fact that banks may need to raise more capital in order to cover losses from the further fall in mortgage prices.

Nov. 20 (Bloomberg) — The U.S. may need to spend another $1.2 trillion to recapitalize the eight largest financial institutions and stabilize the markets because private investors won’t take the risk, an FBR Capital Markets analyst said.

Nov. 20 (Bloomberg) — General Electric Co., down 61 percent this year in New York, is seeking funds from China Investment Corp., Government of Singapore Investment Corp. and at least two other sovereign-wealth funds.

Nov. 20 (Bloomberg) — Switzerland’s central bank slashed its benchmark interest rate by an unprecedented percentage point after the economic growth outlook worsened.

Nov. 20 (Bloomberg) — U.S. lawmakers deadlocked on a plan to bail out the Big Three automakers, leaving General Motors Corp. facing the prospect it could run out of cash before a new Congress can come to the rescue next year.

Nov. 20 (Bloomberg) – Russian Prime Minister Vladimir Putin vowed tax cuts, defense of the ruble and “everything” needed to prevent the kind of financial crises that shook the country after the collapse of the Soviet Union.

Nov. 20 (Bloomberg) – Iceland got a $4.6 billion bailout from the International Monetary Fund and four Nordic countries to help resurrect the island’s economy after the failure of its biggest banks and the collapse of its currency.

Nov. 20 (Bloomberg) – The cost of protecting corporate bonds from default surged to records around the world as the prospect of U.S. automakers filing for bankruptcy protection fueled concern of more bank losses and a deeper recession.

“Markets are back in crisis mode,” said Agnes Kitzmueller, a Munich-based credit strategist at UniCredit SpA, Italy’s biggest bank. “There is fear in the market.”

Richard Shaw
QVM Group LLC

This entry was posted on Thursday, November 20th, 2008 at 1:57 pm and is filed under Market Conditions, Risk Management. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.